Download Adjustable Rate Mortgage

Name ________________________________
Incremental Financing and Junior Mortgage
Practice Problems
1. You can borrow 95% of the purchase price at a rate of 6.75%. You can borrow 80%
of the purchase price at 6.25%. What is the incremental cost of borrowing? Assume
monthly payments for 30 years.
9.27%
2. Mr. Davis is assuming a mortgage of $95,000 that has a contract rate of 5.75% and 15
years until maturity. In addition, he is taking out a second mortgage for $30,000 at
9%. The second mortgage also has a 15 year term. What is the combined borrowing
cost? Payments occur monthly.
6.56%
3. To purchase our home we have decided to choose an 80-10-10 mortgage with
monthly payments. The 80% loan is for 30 years and has a contract rate of 6.75%.
The 10% loan is for 15 years and has a contract rate of 9%. What is the lenders’
combined yield? The purchase price is $150,000
6.92%
Name ________________________________
Cash Equivalency
Practice Problems
1. A seller offers zero percent financing for 15 years and nothing down on a home that
has a price of $150,000. Fifteen-year mortgage rates are 7% in the current market
(assuming a 100% LTV). What is the cash equivalent price of this home?
$92,713
2. Mrs. Sellers is selling her home with an assumable mortgage. The balance on the
assumable loan is $130,000. The contract rate is 4.5% and there are 180 remaining
monthly payments. The current market rate on a 15-year loan is 9%. How much
should she increase the asking price in order to capitalize the value of the assumable
mortgage?
$31,950.18
3. You are looking at purchasing a small industrial building the building currently is
offered for sale at $1,875,000 with special financing arranged by the seller. The seller
is offering the property at 5.5% amortized over 15 years assuming a down payment of
20% is included up front. A balloon payment will be required in 5 years. Assuming
you go to the bank and take out a mortgage with the same terms (except the banks
interest rate is 7%), what should you be willing to pay for the property?
$1,790,604
Name ________________________________
Mortgage Backed Securities
Practice Problems
Use the following information to answer the questions.
A pool of mortgages has a principal balance of $40,000,000, a WAM of 20 years, and a
WAC of 7.25%. Payments are monthly.
1. What is the value of the pool if the average life prepayment model is used? The
typical mortgage prepays in 6 years. Use a 9% discount rate.
$36,987,434.34
2. How much prepayment occurs (in dollars) the first month if 200% PSA is assumed?
$13,357.84
3. Using what you know from #2, what is the balance of the mortgage pool at the end of
the first month?
$39,912,158.43
4. What are the CPR and SMM for month 28 if the pool is prepaying at 150% PSA?
CPR= 8.4% & SMM= .0072849
Name ________________________________
Collateralized Mortgage Obligations
Practice Problems
Use the following information to answer the questions.
A pool of mortgages has a principal balance of $40,000,000, a WAM of 20 years, and a
WAC of 7.25%. Payments are annually. A CMO is formed using this pool and has the
following structure.
Class
Principal
Coupon Rate
Tranche A
$12,000,000
7%
Tranche B
$12,000,000
7.25%
Tranche Z
$10,000,000
8.00%
1. What is the cash flow to A in the first year?
$2,589,393.61
2. What is the balance of A at the end of year 1?
$10,250,606.39
3. What is the balance of A at the end of year 2?
Here is the calculation of #3 it is just like #2 in terms of components
Calculate:
Principal Year 2 = $1,018,224.65
Interest Z Year 2 = (Balance Z End Year 1)*(Coupon Z) = 10,800,000 * .08 = $864,000
Solve:
(Balance A End of Year 1) - (Principal Year 2) + (Interest Z Year 2) =
$10,250,606.39 - $1,018,224.65 + $864,000 =
$8,368,381.74
4. What is the residual cash flow in the first year?
$390,000